Taxation of Trusts

The Court of Appeal have now ruled on IRC v Botnar, a case that we discussed in a past bulletin after the hearing of the case in the High Court.

The case involved an offshore trust under which neither the settlor nor his spouse could, on the face of the trust, benefit, so that, it appeared that anti-avoidance provisions could not apply to trust income on the settlor.

At the time of the hearing the settlor Otto Botnar (of Datsun fame) was deceased. The issue was with regard to the assessment of trust income during his lifetime.

The Revenue argued that the settlor and/or his spouse could enjoy the income under the trust within the meaning of (the then) Section 478(5)(d) ICTA 1970 (now Section 739) ie, &#34the individual may, in the event of the exercise … of one or more powers, by whomsoever exercisable and whether with or without the consent of any other person, become entitled to the beneficial enjoyment of the income&#34 because:

1. Under the trust (despite the exclusion of the settlor and his spouse from all benefit) the trustees had the power to exercise their power to appoint benefits on to new trusts, trusts which did not need to exclude the settlor or his spouse; and

2. Because, if as a result of seeking Counsel`s opinion, the trustees were advised to act in a particular way, the trust effectively permitted them to so act

It was held that either together or separately the discretionary powers referred to above operated to confer on the settlor the &#34power to enjoy&#34 the income regardless of whether he did, as a matter of fact, actually enjoy the income.

COMMENT

This judgement is extremely important for all trust drafters where under the trust it is important for either income tax, capital gains tax, or inheritance to exclude the settlor/settlor`s spouse from all benefit.

Whilst the case focussed on income tax provisions analogies are authority for other taxes. To be safe it is sensible to seriously consider not only explicitly excluding the settlor/spouse from the discretionary class (although to avoid the GWR provisions for IHT only the settlor need be excluded) but to also ensure that any power to appoint as a beneficiary fresh trusts (where the settlor is alive) explicitly excludes as a condition the settlor/ settlor`s spouse from such fresh trusts.

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